Why are Mutual Funds so Popular?
Mutual funds provide an easy way for small investors to make long-term, diversified, professionally managed investments at a reasonable cost.
Great for the small investor who cannot afford a professional money manager. With a mutual fund, however, a large group of investors can pool their resources together and make these benefits available to the entire group. There are no “perks” for the largest investor and no penalties to the smallest--all mutual fund holders pay the same fees and receive the same benefits.
Mutual funds make it possible for investors, large and small, to direct a portion of their income towards a particular investment objective.
Many investors simply cannot afford to properly diversify and manage their portfolio throughout the year. To achieve the best results from diversification, a portfolio needs to contain approximately 30 holdings. Instead of going out and purchasing 25-30 different stocks and managing them all year, an investor can just buy shares in a mutual fund and let the manager take care of all of the day-to-day decisions.
Typical Style Categories Available to Equity Investors
Broad-Based Funds -- Investors can use mutual funds to gain exposure to the broad U.S. stock market. A number of funds track such well-known indices as the S&P 500 and Dow Jones Industrials, as well as even broader indices like the Wilshire 5000.
Market Cap Oriented Funds -- Some funds invest exclusively in stocks of a particular size, such as large-caps (generally defined as companies with market caps of at least $10 billion), mid-caps ($1-$10 billion), small-caps ($300 million to $1 billion) or micro-caps ($50-$300 million).
Investment Style/Objective Funds -- Some funds invest primarily in value-oriented stocks. Meanwhile, others are much more aggressive, investing exclusively in growth companies. Still others invest in income-oriented issues. The different investment styles and objectives to choose from are virtually endless.
Industry/Sector/Niche Funds -- Certain funds specialize in one particular industry. For example, some funds invest in Biotech stocks, while others invest only in gold & silver companies, etc. Meanwhile, other funds focus exclusively on niche markets, such as companies that are going through mergers or IPOs (initial public offerings).
Country/Region Specific Funds -- Investors can use mutual funds to gain exposure to equities based in a particular country (Brazil, China, etc) or region (Europe, North America, etc), as well as broad exposure to stocks all over the world.
Actively Managed vs. Index Funds -- Some funds are actively managed by professional money managers. Meanwhile, others are passively managed funds that track a particular index or hold a fixed basket of stocks.
Another advantage of mutual funds is that they usually make it very easy to invest small sums of money on a regular basis. In fact, many funds allow investors to make automatic deductions right from their bank accounts or paychecks.